Economics
is about economizing; that is, about choice among alternative uses of scarce
resources. Choices are made by millions of individuals, businesses, and
government units. Economics examines how these choices add up to an economic
system, and how this system operates. (L.G. Reynolds)
Scarcity is central to economic theory.
Economic analysis is fundamentally about the maximization of something (leisure
time, wealth, health, happiness—all commonly reduced to the concept of utility)
subject to constraints. These constraints—or scarcity—inevitably define a
trade-off. For example, one can have more money by working harder, but less
time (there are only so many hours in a day, so time is scarce). One can have
more apples only at the expense of, say, fewer grapes (you only have so much
land on which to grow food—land is scarce). Adam Smith considered, for example,
the trade-off between time, or convenience, and money. He discussed how a
person could live near town, and pay more for rent of his home, or live farther
away and pay less, “paying the difference out of his convenience”.
Economics as a subject came into being
with the publication of very popular book in 1776, “An Enquiry into the Nature
and Causes of Wealth of Nations”, written by Prof. Adam Smith. At that time it
was called Political economy, which remained operational at least up to the
middle part of the 19th century. It is since then that the economists developed
tools and principles using inductive and deductive reasoning. In fact, the
‘Wealth of Nations’ is a landmark in the history of economic thought that
separated economics from other social sciences.
The word ‘Economics’ was derived from
the Greek words ‘Oikos’ (a house) and ‘Nemein’ (to manage), which meant
managing a household, using the limited money or resources a household has.
Wealth Definition
The early economists like J.E. Cairnes,
J.B.Say, and F.A.Walker have defined economics as a science of wealth. Adam
Smith, who is also regarded as father of economics, stated that economics is a
science concerned with the nature and causes of wealth of nations. That is,
economics deal with the question as to how to acquire more and more wealth by a
nation. J.S.Mill opined that it is the practical science dealing with the
production and distribution of wealth. The American economist F.A.Walker says
that economics is that body of knowledge, which relates to wealth. Thus, all
these definitions relate to wealth.
However, the above
definitions have been criticized on various grounds. As a result, economists
like Marshall, Robbins and Samuelson have put forward more comprehensive and
scientific definitions. Emphasis has been gradually shifted from wealth to man.
As Marshall puts, it is “on the one side a study of wealth;
and on the other, and more important side, a part of the study of man.”
Welfare Definition
Thus according to Marshall, economics not only analysis the
aspect of how to acquire wealth but also how to utilize this wealth for
obtaining material gains of human life. In fact, wealth has no meaning in
itself unless it is used to purchase all those things which are required for
our sustenance as well as for the comforts necessary for life. Marshall, thus,
opined that wealth is a means to achieve certain ends.
In other words,
economics is not a science of wealth but a science of man primarily. It may be
called as the science which studies human welfare. Economics is concerned with
those activities, which relates to wealth not for its own sake, but for the
sake of human welfare that it promotes. According to Cannan, “The aim of
political economy is the explanation of the general causes on which the material welfare of
human beings depends.” Marshall in his book, “Principles of Economics”,
published in 1890, describes economics as, “the study of mankind in the ordinary business of
life; it examines that part of the individual and social action which is most
closely connected with the attainment and with the use of the material requisites
of well being”.
On examining the
Marshall’s definition, we find that he has put emphasis on the following four
points:
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(a)
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Economics
is not only the study of wealth but also the study of human beings. Wealth
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is
required for promoting human welfare.
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(b)
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Economics
deals with ordinary men who are influenced by all natural instincts such as
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love,
affection and fellow feelings and not merely motivated by the desire of
acquiring
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maximum
wealth for its own sake. Wealth in itself is meaningless unless it is
utilized
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for
obtaining material things of life.
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(c)
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Economics
is a social science. It does not study isolated individuals but
all individuals
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living
in a society. Its aim is to contribute solutions to many social problems.
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(d)
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Economics
only studies ‘material requisites of well being’. That is, it studies the
causes
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of
material gain or welfare. It ignores non-material aspects of human life.
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This definition has
also been criticized on the ground that it only confines its study to the
material welfare. Non-material aspects of human life are not taken into
consideration. Further, as Robbins said the science of economics studies
several activities, that hardly promotes welfare. The activities of producing
intoxicants, for instance, do not promote welfare; but it is an economic
activity.
Scarcity Definition
Lionel Robbins challenged the traditional view of the nature
of economic science. His book, “Nature and Significance of Economic Science”,
published in 1932 gave a new idea of thinking about what economics is. He
called all the earlier definitions as classificatory and unscientific.
According to him, “Economics is the science which studies human behaviour as a
relationship between ends and scarce means which have alternative uses.” This definition focused its attention
on a particular aspect of human behaviour, that is, behaviour associated with
the utilization of scarce resources to achieve unlimited ends (wants). Robbins
definition, thus, laid emphasis on the following points:
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(a)
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‘Ends’
are the wants, which every human being desires to satisfy. Want is an
effective
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desire
for a thing, which can be satisfied by making an effort for obtaining it. We
have
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unlimited
wants and as one want gets satisfied another arises. For instance, one may
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have
the desire to buy a car or a flat. Once the car or the flat is purchased, the
person
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wishes
to buy a more spacious and designable car and the list of his wants does not
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stop
here but goes on one after another. As human wants are unlimited, we have to
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make
a choice between the most urgent want and less urgent wants. Thus the problem
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of
choice arises. That is why economics is also called as a science of choice.
If wants
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had
been limited, they would have been satisfied and there would have been no
economic
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problem.
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(b)
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‘Means
’or resources are limited. Means are required to be used for the satisfaction
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of
various wants. For instance, money is an important means to satisfy many of
our
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wants.
As stated, means are scarce (short in supply in relation to demand) and as
such
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these
are to be used optimally. In other words, scarce or limited means/resources
are
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to
be economized. We should not make waste of the limited resources but utilize
them
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very
judiciously to get the maximum satisfaction.
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(c)
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Robbins
also said that, the scarce means have alternative uses. It means that a
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commodity
or resource can be put to different uses. Hence, the demand in the aggregate
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for
that commodity or resource is almost insatiable. For instance, if we have a
hundred
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rupee
note, we can use it either to purchase a book or a fashionable clothe. We may
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use
it in other unlimited ways as we like.
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Let us now turn our attention to the
definitions put forward by modern economists. J.M.Keynes defined economics as
the study of the management of scarce resources and of the determination of
income and employment in the economy. Thus his study centered on the causes of
economic fluctuations to see how economic stability could be established.
According to F. Benham, economics is, “a study of the factors affecting the size, distribution
and stability of a country’s national income.” Recently, economic growth and development has taken an important
place in the study of economics. Prof. Samuelson has given a growth
oriented definition of economics. According to him, economics is the study and
use of scarce productive resources overtime and distribute these for present
and future consumption.
In short, economics is a social science
concerned with the use of scarce resources in an optimum manner and in
attainment of desired level of income, output, employment and economic growth.
SUBJECT MATTER OF
ECONOMICS
The subject matter of economics is
divided into two categories–microeconomics and
macroeconomics. Microeconomics, which
deals with individual agents, such as households and businesses, and
macroeconomics, which considers the economy as a whole, in which case it
considers aggregate supply and demand for money, capital and commodities.
Aspects receiving particular attention in economics are resource allocation,
production, distribution, trade, and competition. Economics may in principle be
(and increasingly is) applied to any problem that involves choice under
scarcity or determining economic value.
The term ‘Micro’ and ‘Macro’ economics
have been coined by Prof. Ragnar Frisch of Oslo University during 1920’s. The
word micro means a millionth part. In Greek mickros means small. Thus
microeconomics deals with a small part of the whole economy. For example, if we
study the price of a particular commodity instead of studying the general price
level in the economy, we actually are studying microeconomics. Precisely,
microeconomics studies the behaviour of individual units of an economy such as
consumers, firms, and industry etc. Therefore, it is the study of a particular
unit rather than all units combined together. Microeconomics is called Price
theory, which explains the composition, or allocation of total production.
In short, microeconomics is the study
of the economic behaviour of individual consumers, firms, and industries and
the distribution of production and income among them. It considers individuals
both as suppliers of labour and capital and as the ultimate consumers of the
final product. On the other hand, it analyses firms both as suppliers of
products and as consumers of labour and capital.
Microeconomics seeks to analyze the
market form or other types of mechanisms that establish relative prices amongst
goods and services and/or allocates society’s resources amongst their many
alternative uses. In microeconomics, we study the following:
Theory of product pricing, which
includes-(a) Theory of consumer behaviour.
(b) Theory of production and costs.
Theory of factor pricing, which
constitutes-(a) Theory of wages.
(b) Theory of rent. (c) Theory of
interest. (d) Theory of profits.
Theory of economic welfare.
Microeconomics has occupied a very
important place in the study of economic theory. In fact, it is the
stepping–stone to economic theory. It has both theoretical and practical
implications. Important points of its significance are mentioned as under:
Microeconomics is of great help in the
efficient management of the limited resources available in a country.
Microeconomics is helpful in
understanding the working of free enterprise economy where there is no central
control.
Microeconomics is utilized to explain
the gains from international trade, balance of payments disequilibrium and determination of
foreign exchange rate.
It explains how through market
mechanism goods and services produced in the community are distributed.
It helps in the formulation of economic
policies, which are meant for promoting efficiency in production, and welfare
of the people.
Microeconomics is the basis of welfare
economics.
Microeconomics is used for constructing
economic models for better understanding of the actual economic phenomena.
Despite the fact that it has so many
benefits, it also suffers from certain defects or limitations. These are:
1. It
is not capable of explaining the functioning of an economy as a whole.
2. It
assumes full employment; which is rare in real life.
3. It
cannot be used for solving the problem relating to public finance, monetary and
fiscal policy etc.
Positive and Normative
Economics
While discussing the scope of
economics, we also think of whether economics is a positive or normative
science. A positive science describes ‘what is’ and normative science explains
‘what ought to be’. Thus a positive science describes a situation as it is,
whereas normative science analysis the situation and suggests/comments on
wrongness or rightness of a thing/state. For example, ‘population in India is
rising’, is a positive statement and ‘Rising population is an obstacle in the
way of development’ is a normative statement.
Classical economists consider economics
as a positive science. They declined any comment about wrongness or rightness
of an economic situation. Robbins also supported the classical view and stated
that economics is not concerned with the desirability or otherwise of ‘ends’.
Therefore, the task of an economist is not to condemn or advocate but to
explore and explain. However, economics should not be treated as only positive
science. It should be allowed to pass moral judgments of an economic situation.
It is, therefore, considered both positive and normative science. Thus,
Economics is the social science that studies the allocation of scarce resources
to satisfy unlimited wants. This involves analyzing the production,
distribution, trade and consumption of goods and services. Economics is said to
be positive when it attempts to explain the consequences of different choices
given a set of assumptions or a set of observations, and normative when it
prescribes that a certain action should be taken.
